Amman’s lenders are performing relatively well despite conflicts in neighbouring states, thanks to supportive regulations and a resilient economy.Published in MEED, 7 June 2015

Banking activity in Jordan slowed down in 2014, with deposits and credit facilities both growing at a more muted rate than the year before. However, results from the opening months of this year suggest the sector may be able to bounce back in 2015.

According to the Central Bank of Jordan, the banking industry’s deposits grew by 9.7 per cent over the course of last year, to reach JD30.3bn ($42.7bn) by the end of December. That was a solid performance and ahead of the 8.9 per cent average rate of growth over the preceding five years, although it did not quite match the 10.5 per cent expansion seen in 2013.

The slowdown was more marked in terms of loans and total assets. The value of credit facilities extended by the country’s licensed banks grew by just 1.8 per cent in 2014 to JD19.3bn, while total assets were up by 4.8 per cent to JD44.9bn. In both cases, this was a significant deceleration from the year before, when credit facilities grew by 6.3 per cent and assets were up by 9 per cent. They are also far below the average of the preceding five years, when loans grew at an average annual rate of 7.8 per cent and assets increased by 7.5 per cent a year.

Private participation

The Central Bank of Jordan has responded by trying to boost private sector economic activity this year. On 3 February, it cut two of the main monetary policy rates, with the overnight deposit window rate dropping from 2.75 per cent to 1.75 per cent and the weekly repurchase rate from 3 per cent to 2.75 per cent.

According to the local Cairo Amman Bank, this new monetary framework is designed to encourage more lending to the private sector. It appears to have had the desired effect. Government bond yields dropped significantly after the rate cuts and loan growth accelerated. During the first quarter of the year, the total value of bank loans rose by JD508m to reach JD19.8bn, an increase of 2.6 per cent compared with the position at the end of December. The total growth in loans over the whole of last year was JD335m.

Bank deposits also grew at a healthy rate in the first quarter of the year. By the end of March, they had reached JD31.1bn, an increase of JD884m, or 2.9 per cent, over the course of the three months.

The ability of the banks to continue growing in the face of the tough political environment in which Jordan finds itself is testament to the resilience of the wider economy. Overall economic growth was about 3.1 per cent last year, according to the Washington-based IMF, and it is expected to increase to 3.8 per cent this year.

Fiscal position

The Jordanian government has been strengthening its fiscal position, with help from the IMF. Under a standby arrangement agreed in August 2012, the fund is providing up to $2bn in financing for Amman. In its latest review of this arrangement, published in early May, the IMF said Jordan’s financial sector remains sound overall, pointing to strong liquidity buffers and improving profitability. It also noted that non-performing loans have declined to their lowest level since 2006 and banks hold capital well above the regulatory requirements.

“Jordan continues to persevere in a difficult regional environment,” said Mitsuhiro Furusawa, deputy managing director of the IMF, in a statement issued on 4 May. “Conflicts in neighbouring countries and hosting refugees continue to put social and economic pressures on the economy, including on the fiscal and external accounts. Nonetheless, growth is picking up, inflation is low, the fiscal and external positions are gradually strengthening, and the banking system is sound overall.”

It is not all good news, however. High unemployment is a persistent problem and the rate has actually been rising this year, reaching 13 per cent at the end of March.

Even so, the improvement in some of the other main macroeconomic indicators suggests there should be a better operating environment for Jordanian banks in future. In anticipation of this, some of the big credit ratings agencies have been cautiously upgrading their views of several lenders in recent months.

Rating upgrades

In March, the US’ Fitch Ratings revised the outlook for Jordan Islamic Bank and Bank of Jordan from negative to stable, citing the stabilisation of the operating environment and the lenders’ solid funding bases, adequate capitalisation, sound liquidity and their long track records of profitability. The US’ Standard & Poor’s had made the same move on its outlook for Arab Bank and Jordan Islamic Bank in November last year.

Arab Bank is the dominant institution in the country, accounting for about 20 per cent of all bank assets, 20 per cent of deposits and 16.5 per cent of credit facilities. It also stands out from its peers in terms of geographic diversification. The bank has more than 600 branches across 30 countries in five continents, including a presence in key financial centres in Europe and Asia. In contrast, other Jordanian banks tend to focus on the domestic scene, with far more limited exposure to international markets.

The group reported a strong increase in profit in 2014 to $577m, a 15 per cent rise compared with the year before. In line with the figures for the sector as a whole, it saw deposits grow more quickly than loans or assets. Deposits were up 4.4 per cent to $32.1bn, while assets increased by 3.8 per cent to $48.2bn.

Arab Bank has had some problems over the past year, however. In September, it lost a court case in a New York federal district court over the provision of financial services to Palestinian militant group Hamas. The bank plans to appeal the ruling, but nothing can be taken for granted. In its most recent review of the bank, Fitch Ratings noted that “at this stage it is difficult to assess potential implications for Arab Bank, financial or reputational or otherwise”.

The next largest bank in Jordan, Housing Bank for Trade & Finance, accounts for about 15 per cent of both the sector’s total assets and deposits and 11 per cent of all loans. It too posted solid growth figures last year, with net profit rising by 16 per cent to $175m, compared with $151m the year before. As with its larger rival, deposits increased at a faster pace than loans or assets.

The picture among the country’s smaller banks was more mixed. Profit at Jordan Islamic Bank was flat, at about $64m for the year, but it too posted solid growth in terms of deposits, loans and assets, of between 4 per cent and 8.4 per cent. Jordan Kuwait Bank suffered a 1.4 per cent decrease in profit in 2014, to $66m, and also saw its loan book shrink by 1.6 per cent. However, it did manage to expand its deposit base and its total assets, by 4.3 per cent and 2.3 per cent respectively.

Meanwhile, the smaller Arab Jordan Investment Bank posted an impressive 46 per cent rise in profit to $34m, helped by the acquisition during the year of UK-based HSBC’s Jordanian operations, the largest such deal in the history of the country’s banking sector. That deal also explains the large increases in the bank’s other key performance metrics. Its total assets grew by 46 per cent to just under $2.5bn, loans were up by 85 per cent to $987m and customer deposits expanded by 70 per cent to almost $1.4bn.

Sustained performance

The overall performance of the banking sector in the past year and its current healthy position give some reason for optimism. However, it is questionable whether the strong performance seen in the first quarter of this year can be sustained over the rest of 2015.

The government has adopted a cautious fiscal stance in an effort to keep its budget deficit under control. Among other things, it has taken advantage of the lower oil price environment to scale back fuel subsidies and it has also pushed through a new income tax law, which came into effect in January. As a result, overall public spending levels are expected to remain flat this year, which means the state will need to borrow less from banks.

That environment presents a challenge for lenders as it means they will have to look elsewhere in search of new borrowers. In its latest report on the Jordanian economy, published in late March, Cairo Amman Bank noted that economic growth this year will depend exclusively on the private sector.